How to Take Out a Mortgage? Every Step in the Mortgage Process

In this article we will walk through, in simple terms, the steps in the buying process and, in more detail, the steps involved in taking out a mortgage. Buying a home is a complex process with many stages. You have to commit to a place to live and, often, to large financial obligations as well. On top of that, you have to deal with many parties you have probably never worked with before — the tax authorities, government bodies, banks, attorneys, and so on. With so many tasks, all of them intricate, mistakes you make now can cost hundreds of thousands of NIS down the road, so it is only natural to feel confused and even put off by the whole thing.

Our goal is to put those worries to rest. We will not dive into the weeds here; instead, we will give you a bird's-eye view of the buying process. The topics we touch on are covered in depth elsewhere on the site, so if you want to dig deeper you can follow the many links in this article.

Before buying the property

Before buying the property, you will need to figure out your purchase budget. That budget is made up of the money you can raise from banks and credit companies, from family and friends, and from the capital you have accumulated over the years. You will be paying off these loans for a long time, so there is a direct link between your repayment capacity and the size of the mortgage. As a rough rule of thumb, for every one hundred thousand NIS you borrow, you need to repay somewhere between 430 and 550 NIS per month. In other words, expect to pay between 4,300 and 5,500 NIS a month for a one-million-NIS mortgage spread over thirty years. Keep in mind that this number shifts with the current mortgage interest rates and with your profile as a borrower. Take a moment and use our calculator, which will tell you the maximum mortgage you can take. You can also use our mortgage simulator to build different mixtures and see how your monthly payment changes over time.

Once you have set your purchase budget, all that remains is to find the right apartment. Look for neighborhoods that fit your needs and check the prices in the listings. Then go to the Israel Tax Authority and look up the transaction prices of properties in that area — so you get a real sense of what apartments there actually sold for in the recent past.

Once you have found an apartment that fits your needs and your budget, it is time to get serious. At this point it is worth bringing in a real estate attorney to handle the negotiation. For reference, on ordinary transactions an attorney's fee runs roughly 0.5%–1% of the property value plus VAT. In other words, if the apartment you buy costs one million NIS, the fee will be somewhere in the region of 5,850 to 11,700 NIS. We are happy to refer you to an attorney if you need one.

This is also the time to start preparing to take out a mortgage. There are things you can do now, even half a year ahead, that will help you land a better mortgage.

Conditions for getting a mortgage

Essential checks before the purchase

Before you sign the purchase agreement, it is worth confirming that the banks will actually give you a mortgage. Two checks are needed: first, that the bank is willing to lend to you based on your data as a borrower, and second, that the property you plan to buy can genuinely serve as collateral for the mortgage.

To confirm that the bank is willing in principle to lend to you, you need a principle approval. In this approval, the bank reviews your financial data and checks that it holds up. It looks at your income, your monthly expenses, the size of the mortgage you are requesting, your tenure at work, and so on. If the bank is satisfied with the data, you get a principle approval: the bank says it is willing, based on the data you declared, to grant you a mortgage. One important note: the interest rates in a principle approval are always very high and usually will not reflect the rates you end up getting during the mortgage process. If you plan to hire a mortgage broker, don't lock your mortgage into bad branches — get a principle approval from just one bank (ideally Bank Leumi digital or the Mizrahi Tefahot Bank mortgage center).

The second check clears the property on the planning and legal side. This one is done by a real estate valuer. In the final stage of the process, the collateral stage, the bank asks the valuer to appraise the property — to check that there are no building violations, no encroachment onto public land, and so on. The valuer decides what the property is actually worth, and based on that the bank determines whether, and on what terms, the mortgage can be approved.

In other words, the property you are buying may be appraised at less than the actual purchase price. If that happens, you will need to come up with additional equity of your own. These days, every bank must give you a referral for an early appraisal right at the principle approval stage. If you use that referral and hire the valuer, you can then use the appraisal at any other bank — subject to the conditions spelled out in section 9(e) of the Bank of Israel procedures for granting residential loans.  Note that you are not required to order an appraisal at this stage (and it costs more here than at the collateral stage), but if the appraised value comes in below the purchase price at the collateral stage, you could run into trouble (for example, having to put in more of your own money).

Buying the property

Once you have a principle approval, an attorney, and a valuer's report in hand, most of the obstacles are out of the way and you can move forward with the purchase. Congratulations! You sign the contract and go pay the purchase tax. The form you receive from the Israel Tax Authority, also called the MASHACH-FORM, is required by the banks before they will grant the mortgage.

Now it is time to build your financing program.

You need to decide whether to hire a mortgage broker or manage the process yourself. You can read here everything you need to know about working with a mortgage broker, about the value you receive from the advisory process and read specifically about how the mortgage advisory process works with us.

If you have decided to manage the process yourself, serious prep work lies ahead — we recommend reading all the articles in the Knowledge Center. Either way, it is best to walk into the negotiation with the banks holding your own mixture. Don't use the bank's mixture; it can cost you hundreds of thousands of NIS more.

Once you have built the right financing program, it is time to get it at the lowest possible cost. This is the interest-rate tender stage. Each bank will give you a rate "quote" for your mixture. To be clear, you are negotiating over a commodity — your mortgage. Just like in a Turkish bazaar, you prepare to do whatever it takes to get the best interest rates: you haggle, work your angles, and apply pressure to hit your target. The bank clerk will do exactly the same — to get you to sign with them, and at the price they want. Each time a new offer comes in, we can analyze the mortgage offer and help you understand the right way to compare mortgage mixtures.

The most effective way to drive the rates down is to bring a competing offer for the same mixture from another bank. The bank will tell you this outright too —  the banker needs to justify why he is cutting the rates. So you negotiate with several banks at once. The process is tiring, but it does have an end: as it drags on, banks drop out of the running, and you are left with a single bank to move forward with toward signing. Congratulations — on to the collateral stage.

The collateral stage

Once the terms of the mortgage are agreed, the bank will ask you to carry out a series of steps that secure its investment. In other words, the bank wants to make sure it gets its money back even if you can no longer keep up with your obligations. This is the collateral stage. What does it actually involve? You can read all about it here — in the mortgage collateral guide — but in short, here is a partial list:

• The bank will ask you to buy life insurance — so that if, heaven forbid, you pass away before the debt is paid off, the insurance company covers it. Use our life insurance calculator to compare offers from 6 companies, or contact us and we will be happy to help.
• The bank will ask you to buy property insurance — so that if the property is damaged, it is compensated for its investment (remember, the bank is a "partner" in your apartment). Note! You will not need property insurance if you buy an apartment whose construction has not yet been completed.
• The bank will ask you to sign an irrevocable power of attorney before an attorney. You authorize the bank to sell the property to cover the outstanding debt if you fail to keep up with the mortgage payments.
• The bank will ask you to register a caveat (warning note) in its favor at the Land Registry "Tabu" (or with a managing company, depending on the legal status of the property) — so that nothing can be done with the property without its approval.
• The bank will ask you to register a pledge with the Israeli mortgage registrar

The bank will also ask for additional documents to confirm that you need the money in order to buy the property. It will ask for:

• The purchase agreement plus annexes, to confirm that you really did buy the property.
• The MASHACH-FORM mentioned earlier — to rule out money laundering and confirm that you reported the purchase to the Israel Tax Authority.
• A record of all the payments you have made to the seller so far, and a statement of the outstanding debt you have left.
• It will ask you to register a caveat in your name, so that the seller cannot sell the property to two buyers at once.

These are not all the documents, and you may be asked to produce more before the application is approved. Likewise, with a mortgage refinancing there are extra steps — such as requesting a second-degree mortgage and obtaining a letter of intent from the mortgagee bank.

Once this process is complete, you pay a account-opening fee. And then — you have reached the finish line! The bank transfers the money to the seller, and the attorney wraps up the transaction by transferring ownership into your name.

Congratulations!